1. Field of the Invention
The present invention generally relates to financial systems for processing financial information and for securing repayment of loans. More particularly, the present invention relates to systems and methods for structuring loans to be secured by mortgages on real estate.
2. Related Art
With home mortgage loans, in addition to requiring periodic repayment of the principal balance of a loan through installments, lenders also charge interest to compensate the lender for the use of the borrowed funds and for assuming the risk of nonpayment. Calculation of an interest rate is partly determined by the lender's cost to provide the funds for the loan. The interest rate is also determined by the lender's calculation of a variety of risks, such as the risk that interest rates will change during the term of the loan, or the risk that the borrower may cease payments on the debt.
Home mortgage lenders require that borrowers grant the lender a security interest in the borrower's home through a mortgage instrument. Consequently, one common measure of risk compares the principal loan balance to the value of the home that is secured under the mortgage. The higher the loan balance is in relation to the value, the greater the amount of risk. Lenders describe this as a loan-to-value (LTV) ratio. Where the loan amount is 80% of the value of the home, the borrower is considered to have an 80% LTV ratio. Current underwriting standards generally require loans with LTV ratios greater than 80% or higher than 80% to have additional risk protection through some form of additional security. Borrowers might provide such additional security by paying a higher interest rate, or through some other means, such as by obtaining mortgage insurance.
Borrowers may also be required to provide additional security where the borrower has a poor credit history, even though the LTV ratio may be as low as 70% and provide an adequate buffer of equity relative to the loan amount and the value of the home.
While other forms of providing lenders with additional security for repayment of a home loan exist, either where the LTV ratio exceeds a certain predetermined threshold value (e.g., 80%), or where the borrower has poor credit, mortgage insurance is the most common form of providing that additional security. A mortgage insurance policy protects the lender in the event of a payment default by the borrower by paying the lender some or all of the unpaid balance of the loan and costs of foreclosure upon completion of a foreclosure process under state law. Typically, the borrower pays for the mortgage insurance policy by paying a monthly mortgage insurance premium to the lender in addition to the regular home mortgage principal and interest payment. However, current U.S. tax laws do not permit a borrower to deduct mortgage insurance premiums paid and therefore borrowers may prefer an alternative means of providing additional security to the lender.
What is needed is a method for structuring a supplemental interest mortgage that offers borrowers an alternative home financing arrangement without borrower-paid mortgage insurance for loans that nevertheless represent a higher than generally acceptable risk, and provides borrowers with additional benefits, such as tax deductibility of the mortgage interest paid and early cancellation of the supplemental interest mortgage component, among other benefits.